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State Releases Web Version of Annual Written Examination for Registered Investment Advisers

Investment Advisers registered with the State of New Jersey will now be able to complete their Annual Written Examination online. In addition to answering the examination questions, advisers now have the ability to upload related documents online, negating the need to send paper mailings to the state.

A release issued by the New Jersey Bureau of Securities states that “the answers to [the examination] questions are used to determine the need for an on-site or desk examination, as well as to monitor the different approaches used to render the investment advice.”

The examination questions cover topics related to the adviser’s business model, including:

Clients and business activities

Policies and procedures that the adviser has in place

Personnel, associated persons and other business activities

Client complaints

Advertising and promotional activities

Custody and financial condition

Instructions and a link to the examination can be found here. If you have questions or concerns about the new examination format or the questions contained in the examination, please do not hesitate to contact us.

On December 1st and 2nd Private Equity International (PEI) will be hosting a Fund Compliance Forum in San Francisco. The forum will be focused on providing private equity firms with information on various Dodd-Frank compliance requirements, including the investment adviser registration requirement. Karl Cole-Frieman, a partner with Cole-Frieman & Mallon LLP, will a panelist and will be discussing the compliance issues associated with marketing materials. The overview of the session by Karl can be found here.

Information on the event is posted below and can be found on the PEI website by clicking here.

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PEI Private Fund Compliance Forum: San Francisco

An enormous collective sigh of relief was felt around the private equity world when the SEC announced that the deadline to register was moved to March 30, 2012. This extension has given private equity firms more time to designate a chief compliance officer, implement a compliance program, and file all necessary forms with the SEC.

The PEI Private Fund Compliance Forum: San Francisco provides private equity and venture capital firms an opportunity to gain a more complete understanding of what newly registered private funds should expect post-registration and how to implement and manage an effective compliance program.

This one and a half day event, divided into panel discussions and in-depth workshop sessions, is tailored to firms that are in the process of registering with the SEC, those firms that are seeking more information about the scope of what is entailed in registration as well as those who are already operating as RIAs that are looking to enhance their compliance functions.

Yesterday the SEC announced that they will conduct an Open Meeting on June 22 to determine whether to adopt the new hedge fund registration requirements and related rules. At the Open Meeting the SEC is expected to delay implementation of the regulations until next year. While the SEC announced in a letter to NASAA that they would likely extend the registration deadline, there has been no official action on this issue. This has left managers (and lawyers and compliance personnel) unsure of how to proceed. We will know more after the June 22 meeting.

The notice of the Open Meeting, reprinted below in full, can be found here. Hat tip to Doug Cornelius at Compliance Building for publishing this story earlier today.

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Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on June 22, 2011 at 10:00 a.m., in the Auditorium, Room L-002.

The subject matters of the Open Meeting will be:

Item 1: The Commission will consider whether to adopt new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to gi

ve effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration of investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and address reporting by certain investment advisers that are exempt from registration.

Item 2: The Commission will consider whether to adopt rules that would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States. These exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules also would clarify the meaning of certain terms included in a new exemption for foreign private advisers.

Item 3: The Commission will consider whether to adopt a rule defining “family offices” that will be excluded from the definition of an

Many SEC and state registered investment advisers have completed the new Form ADV 2 as part of the annual updating amendment.* The SEC recently published guidance with respect to certain aspects of the new form. The question and answer style guidance deals with such topics as: IARD submission deadlines, delivery of the brochure, and the Part 2B brochure supplement (for certain “supervised persons” with client contact). For hedge fund managers, the most important points include:

Fund managers do not need to provide investors in the fund with copies of Form ADV Part 2.

In Part 2A, hedge fund managers are required to only briefly discuss the major risks of the fund’s investment strategy and then may direct investors to the fund’s offering documents for more detailed information on the risks of the program.

Offshore hedge fund managers who only provide advice to offshore funds do not have to file or prepare an ADV Part 2.

Part 2B Brochure Supplements (for “supervised persons”) do not need to be delivered until later this year.

Below we have reprinted some of the more applicable portions of the guidance. The full set of questions and answers can be found here.

* Note: most state registered advisers were required to complete the new Part 2 by March 31 as required by the state securities administrator. Some states, such as Colorado, do not require the new Part 2 until later this year. If you are a state or SEC registered adviser who has not submitted the new Part 2, please feel free to contact us and we can help you with this process.

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Updated as of March 18, 2011

Staff Responses to Questions About Part 2 of Form ADV

The staff of the Division of Investment Management has prepared the following responses to questions about Part 2 of Form ADV, under the Investment Advisers Act of 1940 and expects to update from time to time our responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the most recent Amendments to Form ADV (dated July 28, 2010, the “Adopting Release”) can be found at: http://www.sec.gov/rules/final/2010/ia-3060.pdf.

Compliance Dates

Question I. 1

Q: The Commission has extended the compliance dates for certain advisers to deliver Part 2B, the brochure supplement. What are the new compliance dates?

A: On December 28, 2010, the Commission extended the compliance dates for delivery of Part 2B for certain investment advisers. (See IA-3129 athttp://www.sec.gov/rules/final/2010/ia-3129.pdf)

All advisers registered with the Commission as of December 31, 2010, and having a fiscal year ending on December 31, 2010 through April 30, 2011, have until July 31, 2011, to prepare and begin delivering brochure supplements to new and prospective clients and have until September 30, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for all other advisers registered with the Commission as of December 31, 2010 remain unchanged. Upon filing their new brochures through the IARD, they must start to provide to their new clients a brochure supplement for a supervised person before or at the time that supervised person begins to provide advisory services to the client. In addition, they must deliver brochure supplements to their existing clients within 60 days of when they are required to file their new brochures with the Commission.

All newly registered advisers filing their applications for registration from January 1, 2011 through April 30, 2011, have until May 1, 2011 to prepare and begin delivering brochure supplements to new and prospective clients and have until July 1, 2011 to deliver brochure supplements to existing clients. The compliance dates for delivering brochure supplements for newly registered advisers filing applications for registration after April 30, 2011 remain unchanged. (Posted March 18, 2011)

Question I. 2

Q: Has the Commission also extended the compliance dates for filing and delivering Part 2A, the brochure (“new brochure”)?

A: No. The compliance dates for delivering new brochures remain unchanged for both newly registered advisers and existing advisers.

Each adviser currently registered with the Commission whose fiscal year ends on or after December 31,

2010 must include in its next annual updating amendment to its Form ADV a new brochure. (Rule 204-1(c)) Upon filing its new brochure with the Commission, an adviser must (i) begin to deliver the new brochure to new clients and prospective clients in lieu of its old brochure in accordance with its obligations under rule 204-3, and (ii) deliver to its existing clients within 60 days of when an adviser is required to file it. (Rule 204-3(g)).

Each adviser applying for registration with the Commission after January 1, 2011 must file a brochure or brochures that meet the requirements of amended Part 2A as part of the application for registration on Form ADV. (Rule 203-1(b)). Such an adviser must, upon registering, begin to deliver to its clients and prospective clients the new brochure or brochures in accordance with rule 204-3(a). (Posted March 18, 2011)

Preparing Brochures

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Question II. 4

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses pooled investment vehicles as a significant investment strategy or method of analysis to duplicate the risk disclosures contained in a prospectus or other offering document for the pooled investment vehicle?

A: An adviser may satisfy the requirement of Item 8.B by providing a brief explanation of the material risks for each strategy and referring clients to the prospectus, offering memoranda, or other documents that a client participating in the pool will or has received that set out a more detailed discussion of risks. (Posted March 18, 2011)

Question II. 5

Q: Item 8.B of Part 2A requires an adviser to explain the material risks for each significant investment strategy or method of analysis the adviser uses. Does Item 8.B require an adviser that uses multiple investment strategies or methods of analysis to explain the material risks for each significant investment strategy or method of analysis in the brochure?

A: Yes, an investment adviser using multiple significant investment strategies or methods of analysis must explain the risks for each significant investment strategy or method of analysis it uses. An adviser using multiple strategies or methods of analysis may satisfy the requirements of Item 8.B by summarizing the strategies and methods and their material risks and referring clients and prospective clients to a separate disclosure document that the client has or will receive that sets out a more detailed explanation of the material risks of investment strategies or methods of analysis that are or will be used to manage the client’s account. (Posted March 18, 2011)

Question II. 6

Q: The staff has previously stated its view that an offshore adviser to an offshore private fund does not have an obligation to deliver a brochure under rule 204-3 to the offshore fund or to any investors in an offshore private fund it advises. ABA Subcommittee on Private Investment Entities, SEC Staff Letter (Aug. 10, 2006). The note to rule 203-1 states that an adviser that does not have to deliver a brochure to any clients does not have to prepare or file a brochure with the Commission. Does the 2006 staff response and the note work together such that an offshore adviser whose only clients are offshore funds would not have to prepare or file a brochure as part of its Form ADV?

A: Yes. (Posted March 18, 2011)

Filing and Delivering Brochures

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Question III. 2

Q: Rule 204-3 requires an adviser to deliver a brochure and one or more brochure supplements to each client or prospective client. Does rule 204-3 require an adviser to a hedge or other private fund to deliver a brochure and supplement(s) to investors in the private fund?

A: Rule 204-3 requires only that brochures be delivered to “clients.” A federal court has stated that a “client” of an investment adviser managing a hedge fund is the hedge fund itself, not an investor in the hedge fund. (Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006)). An adviser could meet its delivery obligation to a hedge fund client by delivering its brochure to a legal representative of the fund, such as the fund’s general partner, manager or person serving in a similar capacity. (Posted March 18, 2011)

Question III. 3

Q: Must an adviser to a hedge fund or other private fund file as part of its Form ADV the brochure it is required to deliver to the hedge fund or other private fund?

A: Yes. (Posted March 18, 2011)

Covered Persons for Brochure Supplements

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Preparing Brochure Supplements

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Delivery of Brochure Supplements

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Cole-Frieman & Mallon LLP is a boutique hedge fund law firm. We provide investment adviser registration and compliance services to SEC and state registered hedge fund managers. Bart Mallon can be reached directly at 415-868-5345.

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 204-4 provides that certain “exempt reporting advisers” are required to file Form ADV with the SEC. The instructions to Form ADV will specify which information on Form ADV is to be completed by such “exempt reporting advisers.”

The term “exempt reporting advisers” means an adviser exempt from SEC registration because:

the adviser only advises solely one or more “venture capital funds” (Advisers Act Section 203(l)); or

the adviser acts only as an adviser to private funds and has AUM in the US of less than $150MM (Advisers Act Section 203(m)).

The full proposed revised rule is reprinted below.

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§ 275.204-4 Reporting by exempt reporting advisers.

(a) Exempt Reporting Advisers. If you are an investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Act (15 U.S.C. 80b-3(l) or 80b-3(m)), you must complete and file reports on Form ADV (17 CFR 279.1) by following the instructions in the Form, which specify the information that an exempt reporting adviser must provide.

(b) Electronic Filing. You must file Form ADV electronically with the Investment Adviser Registration Depository (IARD) unless you have received a hardship exemption under paragraph (e) of this section.

Note to paragraph (b): Information on how to file with the IARD is available on the Commission’s website at http://www.sec.gov/iard.

(c) When filed. Each Form ADV is considered filed with the Commission upon acceptance by the IARD.

(d) Filing fees. You must pay FINRA (the operator of the IARD) a filing fee. The Commission has approved the amount of the filing fee. No portion of the filing fee is refundable. Your completed Form ADV will not be accepted by FINRA, and thus will not be considered filed with the Commission, until you have paid the filing fee.

(e) Temporary hardship exemption.

(1) Eligibility for exemption. If you have unanticipated technical difficulties that side effects of ciprofloxacin hcl prevent submission of a filing to the IARD system, you may request a temporary hardship exemption from the requirements of this chapter to file electronically.

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 203A-5 provides that (i) SEC registered investment advisers must report their AUM to the SEC by August 20, 2011 and (ii) if such advisers are at that time below the threshold for SEC registration, the adviser must withdraw from SEC registration by October 19, 2011 (and generally be registered with the state in which the adviser’s maintains its principle office and place of business).

The full proposed revised rule is reprinted below.

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§ 275.203A-5 Transition rules.

(a) Every investment adviser registered with the Commission on July 21, 2011 shall file an other-than-annual amendment to Form ADV (17 CFR 279.1) no later than August 20, 2011 and shall determine its assets under management based on the current market value of the assets as determined within 30 days prior to the date of filing the Form ADV.

(b) If an investment adviser registered with the Commission on July 21, 2011 would be prohibited from registering with the Commission under section 203A(a)(2) of the Act (15 U.S.C. 80b-3a(a)(2)), and is not otherwise exempted by § 275.203A-2 from such prohibition, such investment adviser shall withdraw from registration with the Commission by filing Form ADV-W (17 CFR 279.2) no later than October 19, 2011. During this period while an investment adviser is registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to the investment adviser’s advisory activities.

(c) If, prior to the effective date of the withdrawal from registration of an investment adviser on Form ADV-W, the Commission has instituted a proceeding pursuant to section 203(e) of the Act (15 U.S.C. 80b-3(e)) to suspend or revoke registration, or pursuant to section 203(h) of the Act (15 U.S.C. 80b-3(h)) to impose cipro dosage terms or conditions upon withdrawal, the withdrawal from registration shall not become effective except at such time and upon such terms and conditions as the Commission deems necessary or appropriate in the public interest or for the protection of investors.

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Bart Mallon, Esq. is a hedge fund lawyer and providers legal services to hedge fund managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

The SEC has proposed certain new rules as well as amendments to existing rules under the Investment Advisers Act as a result of the Dodd-Frank Act. The following proposed new rule 203A-1 will replace existing Rule 203A-1. The new rule will provide state and SEC registered investment advisers with information on the time requirements for switching between the registration status. The full proposed revised rule is reprinted below.

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§ 275.203A-1 Switching to or from SEC registration.

(a) State-registered advisers—switching to SEC registration. If you are registered with a state securities authority, you must apply for registration with the Commission within 90 days of filing an annual updating amendment to your Form ADV reporting that you are eligible for SEC registration and are not relying on an exemption from registration genuine viagra online under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)).

(b) SEC-registered advisers—switching to State registration. If you are registered with the Commission and file an annual updating amendment to your Form ADV reporting that you are not eligible for SEC registration and are not relying on an exemption from registration under sections 203(l) or 203(m) of the Act (15 U.S.C. 80b-3(l), (m)), you must file Form ADV-W (17 CFR 279.2) to withdraw your SEC registration within 180 days of your fiscal year end (unless you then are eligible for SEC registration). During this period while you are registered with both the Commission and one or more state securities authorities, the Act and applicable State law will apply to your advisory activities.

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Bart Mallon, Esq. runs the hedge fund law blog and provides hedge fund registration and compliance services to managers through Cole-Frieman & Mallon LLP. He can be reached directly at 415-868-5345.

On November 19, the SEC released proposed rules with respect to the new hedge fund registration requirement under the Dodd-Frank act. The major proposals include the following:

Rules with respect to the manner and process of registration of hedge fund and private equity fund managers.

Reporting requirements for registered hedge fund and other private fund managers. This will include:

Basic organizational and operational information about the funds they manage, such as information about the amount of assets held by the fund, the types of investors in the fund, and the adviser’s services to the fund.

Identification of five categories of “gatekeepers” that perform critical roles for advisers and the private funds they manage (i.e., auditors, prime brokers, custodians, administrators and marketers).

Basic identifying information for the adviser and the identity of its owners and affiliates.

Information about the private funds the adviser manages and about other business activities that the adviser and its affiliates are engaged in that present conflicts of interest that may suggest significant risk to clients.

The disciplinary history of the adviser and its employees that may reflect on their integrity.

Exempt reporting advisers would file reports on the Commission’s investment adviser electronic filing system (IARD), and these reports would be publicly available on the Commission’s website.

Defining the term “venture capital fund” and the term “foreign private adviser”.

Providing guidance on SEC to state registration for managers who will no longer be allowed to register with the SEC due to increase in registration asset threshold

We will have the opportunity to fully review these proposals over the next few days and will be providing a report on the proposed regulations and will outline the comments we intend to send to the SEC. Public comments on the proposal will be due to the Commission in early January 2011.

State-registered investment advisory firms need to make sure that their employees who are deemed to be “investment advisory representatives” are appropriately registered. This means that any employee (or owner) of the IA firm who provides investment advice or who has supervisory authority will generally need to be registered with the state as a representative of the firm. In order to register, the applicant will need to have certain qualifications and generally the series 65 will be sufficient for these purposes.

There are consequences for not properly registering employees as investment advisor representatives. In an earlier article on whether IA firms can have silent owners, we discussed the fact that many state administrators have the power to censure or fine IA firms if they do not follow the registration rules. I recently stumbled across an example of a state taking such an action.

In the attached Disciplinary Order, the Texas State Securities Board (“Board”) concluded that the “unregistered employee” of the registered investment advisory firm provided investment advice to IA clients for compensation and that the IA firm failed to maintain a supervisory system reasonably designed to ensure compliance with the Texas Securities Act and Board Rules. The Board reprimanded the IA firm and also ordered an administrative fine of $5,000. The firm was required to comply with the Act and Board Rules moving forward.

The two important take-aways from this order are:

Always make sure employees are registered or clearly exempt from registration, and

Always ensure that you have an up-to-date compliance program that helps to ensure that the firm will operate within all applicable laws and regulations.

We always recommend that registered IA firms discuss any registration and compliance related matters with an experienced investment management attorney with detailed knowledge of the laws of the state where the firm is registered.

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.

The press release below from NASAA, the representative body of the state securities administrators, announces an IARD (Investment Adviser Registration Depository) fee waiver for next year. The fee waiver will cover both the IARD fees for registering investment advisory firms as well as the fees for individuals. Previously firms had to pay an IARD fee to use the IARD system. Now, firms which are registering as investment advisors for the first time (as well as firms filing investment adviser renewals) will not need to pay any IARD fees. However, firms will still need to pay any applicable state fees.

Chief compliance officers of investment advisory firms should begin getting ready for the IA renewal process which begins in earnest in the beginning to middle of next month. Keep checking in for more information on investment adviser registration and compliance.

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October 13, 2009
NASAA Announces IARD System Fee Waiver

WASHINGTON (October 13, 2009) – The North American Securities Administrators Association (NASAA) today announced it will waive the initial set-up and annual system fees paid by investment adviser firms (IAs) and investment representatives (IARs) to maintain the Investment Adviser Registration Depository (IARD) system.

Denise Voigt Crawford, NASAA President and Texas Securities Commissioner, said, “The IARD system promotes effective and efficient investor protection through readily accessible disclosure of important information to the public while at the same time offering a consistent and streamlined registration process for investment advisers and their representatives. Given the current economic climate, we are pleased that the IARD system’s continued success will allow us to maintain the system fee waivers put in place in 2005 for investment adviser firms and also to fully waive for a second year the system fees paid by investment adviser representatives.”

NASAA’s Board of Directors approved the system fee waiver and will continue to monitor the system’s revenues to determine whether future fee adjustments are warranted.

The IARD system is an Internet-based national database sponsored by NASAA and the SEC and operated by FINRA in its role as a vendor. IARD provides a single nationwide database for the collection and dissemination of information about individuals and firms in the investment advisory field and offers investment advisers and representatives a single source for filing state and federal registration and notice filings. The system contains the employment and disciplinary histories of more than 25,000 investment adviser firms and nearly 250,000 individual investment adviser representatives. IARD system fees are used for user and system support and for enhancements to the system.

NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

For more information:
Bob Webster, Director of Communications
202-737-0900